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Wireless Providers Surge on MetroPCS, T-Mobile Merger Report

Written by: Antoine Gara05/09/12 - 1:42 PM EDT

Tickers in this article:
T S PCS LEAP VZ

NEW YORK ( TheStreet) -- On the heels of a stock slump after it missed first quarter earnings and saw subscriber losses, MetroPCS(PCS) is again the subject of merger speculation as struggling telecoms surge on the prospect of industry consolidation.

Bloomberg reports that Deutsche Telekom is considering merging its U.S.-based unit T-Mobile USA with MetroPCS. The report comes just months after T-Mobile's attempted merger with AT&T(T) was blocked by the Department of Justice on antitrust concerns.

It's not the first time MetroPCS has been mentioned in M&A reports. In late February, the company was close to unveiling a merger with Sprint(S) -- another struggling wireless carrier -- until a deal fell apart at the last hour. Now expectations that sector laggards will consolidate have some telecoms surging.

According to Bloomberg, Deutsche Telekom is considering a stock-swap of its T-Mobile unit with MetroPCS that would give the German telecom giant control over the combined entity. Those reports cite unnamed sources, who also note that Europe's second largest phone company could sell or IPO its Richardson, Texas-based T-Mobile unit.

Already, Deutsche Telekom is looking to sell T-Mobile assets such as cellular towers in a move to bolster its balance sheet. Meanwhile, MetroPCS was considered a key piece of T-Mobile's attempted $39 billion merger with AT&T, because it was a likely acquirer of divested assets that would have been recommended by antitrust regulators.

MetroPCS shares surged nearly 20% to $7.72 on reports of a potential merger. Still shares in MetroPCS are off over 11% year-to-date and nearly 60% in the last 12 months on the prospect of subscriber losses. Leap Wireless shares also rose nearly 20% to $6.04 signaling investor expectations that it could become the target of strategic interest, while Sprint rose over 3%.

Leap they haven't: all three companies' shares have lost over 50% in the last year.

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Recent earnings at T-Mobile, Sprint, MetroPCS, and Leap Wireless (LEAP) signal that smaller carriers and even Verizon(VZ) and AT&T, the top two U.S. wireless providers, are struggling to benefit from a surge in smartphone sales led by Apple's(APPL) iPhone.

"AT&T and Verizon are the only two companies in the U.S. wireless industry that will earn enough to cover their cost of capital," wrote Moody's in a Feb. 13 note that highlighted a Sprint and MetroPCS tie-up as a possibility among scenarios of needed consolidation within the telecom sector.

"Investors are already walking away, making it harder for the carriers to attract capital to keep pace," added Moody's.

In attempting to buy MetroPCS in what could have been a $8 billion deal, Sprint was likely to use its low-priced stock to fund the deal because of limited access to debt markets. Analysts noted that a deal would likely have diluted Sprint's stock by 50% at the time, while bringing in much needed cash. "Investors are already being asked to fund a ~$15bn commitment to Apple in order to sustain postpaid market share," noted Nomura analyst Mike McCormack in February.